Shareholder lawsuits face new legal requirements; decision in Teledyne suit could set a legal precedent.

A recent state appellate court ruling in a shareholder lawsuit filed against directors of Los Angeles-based Teledyne Inc. could affect similar cases now pending against other local companies, lawyers said.

In a case entitled Rodney B. Shields vs. Henry Singleton and Teledyne Inc., Shields, in the name of Teledyne, sued Teledyne's directors in Los Angeles Superior Court to recover for the company damages it incurred from allegedly unlawful activities of employees.

In the suit, Shields alleged that Teledyne's directors breached their fiduciary duties by failing to prevent the criminal acts of Teledyne employees and, as a result, are liable for the resulting damages.

However, the California State Second Appellate District Court disagreed, ruling unanimously that in such a suit, a shareholder must allege "the precise acts (of wrongdoing) which each individual director allegedly engaged in."

Through this decision, the appellate court set a new legal standard at the pleading stage that the shareholder must demonstrate with clarity the specific wrongs done by company directors and provide supporting facts, said David Siegel, the partner at Irell & Manella in charge of the defense of Teledyne's directors.

"This (ruling) will protect honest men and women who serve on corporate boards from multimillion-dollar claims by shareholders in the name of their companies for wrongdoing by other company employees," said Siegel.

He added that current cases, including a very large local company stockholder derivative suit, which he would not name, could be affected by the case.

"We plan to use this case in our briefs, as a claim to get these other cases overturned," Siegel said.

However, Kevin Roddy, a partner with New York-based Milberg Weiss, Bershad, Hynes & Lerach, which represented shareholder Shields, said last week he planned to file a petition on June 4 to appeal the case on the grounds that the court did not fully explore all the allegations made by shareholders in the case. If this petition for the appellate court to review its own decision is denied, Roddy said he will petition the state Supreme Court to review the case.

"We disagree with the court's reasoning," he said. "There were allegations against the directors that the court ignored."

The Teledyne case focuses on so-called derivative lawsuits, in which a company shareholder files suit in the name of the company against its directors or officers, arguing that they should have prevented or known of an action which caused the company fiscal damage.

In such cases, a shareholder must ask the corporation's board of directors to pursue such claims unless the shareholder can show to the court that such demands would be futile.

On May 20, the California State Second Appellate District Court unanimously affirmed an Los Angeles Superior Court ruling of June 1990, which observed that the plaintiff "did not allege a single fact which would indicate that the directors has any knowledge of, much less participated in, any criminal or fraudulent activities, nor that they benefited directly from the wrongdoing."

That ruling specifies procedures which must be followed by shareholders who file shareholder derivative suits against a company's directors and officers.

"The point of the case is that corporations like Teledyne can be very, very large," said Siegel. "The board supervises but they are very removed from the day-to-day operations of the divisions. This is far from a blanket immunity to a company's board of directors."

Teledyne officials said they were pleased with the way the case has turned out.

"Any favorable ruling we greet with great enthusiasm," said a spokesman with Teledyne. "It's a milestone legal opinion."